Institutional Change in Varieties of Capitalism. Temporary Employment in Germany

Term Paper, 2014
9 Pages, Grade: 1,3


1. Introduction
In the face of globalization many states have been forced to adapt to the new
challenges facing them in an ever more open market. The fact that markets increasingly
escape the bounds of national economies and interact in international perspectives is
apparent for example in the fields of "research, development and manufacturing activities"
(Berger 2000, p. 44). These developments towards internationalization of economic and
social policies and institutions lead in many cases to policies that adapt regulation to new
international challenges or in other cases deregulate markets in a process of liberalization
especially in the fields of labor and financial markets as well as training of workers, wage
bargaining and education. Exemplary for the process of liberalization in the political
economies over the last decades are the economic policies spearheaded by Margaret
Thatcher in the United Kingdom and Ronald Reagan in the United States that transformed
their respective economies radically towards more liberal practices. Especially the shift from
industrialized economies towards ones that are more reliant on the service sector these
adaptions are often unavoidable. (Berger 2000, pp. 43­46; Hall, Soskice 2001, pp. 2­6; Hall,
Thelen 2009, p. 22).
Analyzing these processes and the impact of such policy changes on the political
economies, societies and institutional frameworks has been the focus of research in both
economics and political science ­ namely the Institutionalist branches. As such theoretical
frameworks have been proposed in the literature of new institutional economy to explain the
character of these changes and embed them in the interaction between the relevant actors ­
like institutions, government, firms and organizations. Therefore analyzing and explaining the
differences and similarities between different national economies and their economic
performance is at the center of the analysis. Here the Varieties of Capitalism approach
proposed by Hall and Soskice provides a framework for understanding said differences and
similarities of the political economies in the developed world. Opposed to the simple process
of liberalization the VoC framework assumes the development of political economies
towards the two arrangements of liberal market economies (LME) that feature a constellation

characterized by competitive arrangements for coordination among actors whereas the
model of coordinated market economies (CME) depend on collaborative arrangements (Hall,
Soskice 2001, p. 8). Through this approach VoC provide insights on topics from "issues in
innovation, vocational training, and corporate strategy to [...] legal systems, the development
of social policy, and the stance nations take in international negotiations " (Hall and Soskice
2001, p. 2) while taking an actor-centered and rationalist approach.
The applicability of the VoC framework to explain institutional change has since come
under criticism for oversimplifying the institutional reality and falling short of capturing the
complexities of real-world changes in national political economies with their dichotomous
separation into LMEs and CMEs (Campbell 2010, pp. 14ff). Hall and Thelen (2009) have
however proposed an extension to the VoC framework to analyze institutional change in a
more meaningful way by outlining modes of change along the assumption of institutional
stability in accordance with the VoC framework. After outlining their approach this work aims
to test the assumptions about institutional change in varieties of capitalism against the
introduction of temporary work legislation in Germany to answer the question if a varieties of
capitalism approach is able to explain this example of institutional change sufficiently. All of
this while keeping in mind the CME present in Germany.
2. Institutional Terrain and Institutional Stability
The approach brought forward by Hall and Thelen (2009) aims to extend the VoC
perspective with regards to institutional change and elaborate on both the nature and
stability of institutions. To comprehend this perspective on institutional change it is at first
necessary to outline the assumptions and understanding of institutions and the terrain in
which they interact. In accordance with a wide range of literature on institutions (see North
1990; Hodgson 2006) there is are two ways in which institutions can function. Described "as
a set of regularized practices with rule-like quality" (Hall, Thelen 2009, p. 9) they can be
separated into formal and informal categories where the former describes for example the
rule of law and other firmly graspable constraints and the latter refers to boundaries based
on conventions and expectations.

Concerning the institutional terrain the two assumption are that on the one hand institutions
serve not only as constraints, but also as bodies that provide actors with a range of
possibilities to solve problems of collective action and provide opportunities. On the other
hand they do not only provide the framework in which strategic action takes place and actors
allocate resources, but also provide an entity for actors to interact with and use as a
resource themselves. Importantly actors within a political economy are assumed to interact
with institutions not for the common well-being, but to further their own interest ­ much as in
a game-theoretic sense where cooperation or coordination is achieved not as a result of
common understanding, but as the outcome that represents the intersection of the most
favorable solution for each individual actor.
Considering this institutional terrain, the stability of institutions accordingly depends on
institutions providing possibilities for actors to realize their self-interest. In context of the vast
complexity of the institutional interdependencies the uncertainty of the implications of
establishing new institutions is one factor of institutional stability. Actors will however test the
boundaries of institutions and assess the risks and costs of defection from sanctioned
behavior. This view stands in contrast to the functionalist assumption that stability is solely
dependent on the institution's contribution to national welfare putting emphasis on actors
pursuing self-interests and optimal outcomes (Hall, Thelen 2009, pp. 9­11).
Furthermore stability rests on the fact that adaption to institutions facilitates reliance on
them. As actors organize their processes around existing institutions creating dependencies
and interests connected with said institutions that were not present or intended when the
institution was created (Campbell 2010, pp. 14­15; Hall, Thelen 2009, pp. 10­11).
3. Institutional Change
Deducted from these assumptions about institutional stability two key hypotheses about the
agents and the impetus for institutional change can be deducted. First, there are multiple
agents of adjustment that influence the construction, importance and development of
institutions. On the one hand governments certainly have greater competences concerning
the formal aspects of institutions as they can shape the institutional landscape thoroughly

through regulations. Firms on the other hand through their behavior and strategies can shift
importance from one institution to another and will do so more readily as economic survival
may depend on it. Where firms have to adapt to international developments more rapidly
governments will have to react. So as both actors are facing different pressures and inhibit
different preferences they shape institutional change in the political economy.
4. Three Routes to Institutional Change
There are three routes Hall and Thelen outline that facilitate "institutional change in the
political economy" (Hall, Thelen 2009, p. 15). These processes are namely reforms,
defection and reinterpretation which each feature a distinctive dynamic (Hall, Thelen 2009, p.
1; p. 20f).
The dynamic of reform represents the process leading to institutional change that is
specifically under the authority of governments. As a process that relies on coalitional politics
the objective is to make out the actors involved in reaching support for institutional reform.
Such actors working towards compromises can include different parties as for example
political parties or firms represented by producer groups. Their interaction in a coalitional
setting is characterized by distributive conflicts to which reforms of institutional change
constantly have to be adjusted among the coalition's actors. These conflicts are furthermore
always in context of existing institutions and the stance on reforms in one area of the
institutional structure can always have an effect on an actor's position in a different area
(Hall, Thelen 2009, pp. 20f).
Second, in the process of defection entails an actor, who was previously adhering to them,
choosing to stop acting in accordance to the boundaries and practices set out by an
institution. Furthermore a firm could choose to terminate membership in an association to
open the possibility of restructuring internal processes to improve competitiveness that were
previously impossible under the rules and boundaries set by the association. This process is
in part comparable to the game-theoretic defection from a cooperation strategy (Hall, Thelen
2009, p. 18f).
Excerpt out of 9 pages


Institutional Change in Varieties of Capitalism. Temporary Employment in Germany
University of Bamberg
Seminar - Challenges of Economic Policy
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institutionalism, institutional change, varieties of capitalism, hall, soskice, thelen, temporary employment, zeitarbeit, leiharbeit, bundesrepublik, arbeitsmarkt, arbeitsmarktpolitik
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Christian Horch (Author), 2014, Institutional Change in Varieties of Capitalism. Temporary Employment in Germany, Munich, GRIN Verlag,


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